U-M forecasters: Michigan's economic outlook still tied to fate of NAFTA

ANN ARBOR, MICH. - University of Michigan forecasters hedged their bets Friday in the annual forecast of Michigan's economy, saying a lot depends on the fate of the North American Free Trade Agreement.

NAFTA negotiators are currently trying to reach agreement on what to do about the trade pact between the U.S., Canada and Mexico that created the seamless supply chain that now exists for automotive parts and production.

President Donald Trump has threatened to pull the U.S. out of NAFTA next year if Canada and Mexico do not agree to more favorable terms for the U.S.

In their annual forecast on the Michigan economy, delivered Friday morning in Ann Arbor, U-M economists said Michigan is well-positioned to ride out a NAFTA weakening or pullout by the U.S.

But a lot depends on how that happens. If the three nations impose significant new tariffs on each other's products — known as a "hard withdrawal" — the U-M forecasters expect that to cost Michigan 7,000 factory jobs by 2020 as automotive production shifts to China and elsewhere in Asia.

In a "soft withdrawal," in which there are no additional tariffs, the forecasters say Michigan might actually add 6,400 jobs by 2020 because of additional light truck production here.

"The imposition of a 25% tariff would spark a shift of nearly 1 million automobile assemblies away from Mexico primarily to China and elsewhere in Asia, but not to the U.S.," said Gabriel Ehrlich, director of U-M's Research Seminar in Quantitative Economics. "On the other hand, many light truck assemblies probably would move to the United States."

U-M economic forecasters Ehrlich, George Fulton, Donald Grimes, Daniil Manaenkov and Michael McWilliams prepared the report.

NAFTA concerns aside, the U-M forecast predicts that Michigan's economy, now in its ninth year of growth since the end of the Great Recession, will continue to expand, although more slowly than in recent years.

Some highlights from the forecast:

  • Overall, the U-M economists expect Michigan to keep growing its workforce. After adding an estimated 41,900 jobs this year, Michigan should add another 40,900 in 2018 and 52,200 in 2019.

That works out to about a 1% annual growth rate, which marks a slowdown from the 1.7% annual growth the state enjoyed from summer 2009 to summer 2017. 

"Since last year, the Michigan economy has pumped its brakes, with job growth posting an annual rate of 0.9% in the first three quarters of 2017," Fulton said.

But Michigan will have gained 670,500 jobs during the economic recovery from summer 2009 through the end of 2019, the economists said. That means that Michigan has added back about 80% of the jobs the state shed before and during the Great Recession years.

  • Automotive production has peaked and U-M economists forecast light vehicle sales to decline from the record high of 17.5 million in 2016 to 17.1 million this year and in 2018, then dropping to 17 million in 2019.

Those are still robust levels of output by historical standards, but the forecast calls for a slight decline in manufacturing jobs in the near future. Michigan will lose 9,000 factory jobs over the two-year period through 2019. The Detroit Three market share will remain around 42% over that period.

"Michigan's economy has diversified over the last 20 years, which should make it easier for the state to add jobs even without employment growth in the manufacturing sector," Grimes said.

  • The U-M economists see Michigan's unemployment rate dropping from an average of 4.4% this year to 4.2% next year and 4.1% in 2019.

Almost all of the job growth will come from five sectors outside of manufacturing. Those are construction; professional and business services; trade, transportation and utilities; private education and health services, and leisure and hospitality.

The big winner: professional and business services, often called the knowledge jobs of the future, which will add 37,300 jobs by 2019, amounting to about 40% of all the jobs Michigan adds. That will put a premium on an educated workforce with skills that are in demand.

But if the forecast presented Friday was mostly upbeat, there was a cloud shadowing the good news.

"It bears noting that the state had over 300,000 more employed in 2000 than it does today," McWilliams said. "The labor participation rate has drifted down further since the end of last year, meaning that a substantial part of the drop in the state's unemployment rate came from Michiganders exiting the labor force rather than finding jobs."

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© 2017 Detroit Free Press


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